PRE-PACKAGED INSOLVENCY FRAMEWORK: A BOON OR BANE

FOR INDIA

Abstract
To safeguard the companies or business entities from being in distress, the government has
provided us with a robust mechanism to upgrade the competition and innovation in the market,
which can be witnessed from India’s position in various rankings. In the World Bank Group’s
Doing Business Reports, India’s rank improved from 136 to 52 in ‘resolving insolvency.’ 1 In the
Global Innovation Index, India’s position has moved up from 111 in 2017 to 47 in 2020 in ‘Ease
of Resolving Insolvency.’2 The Central Government efforts and Insolvency and Bankruptcy
Code, 2016 were the key pillars behind this achievement. Unfortunately, due to COVID-19, the
companies have faced immense distress. To overcome this challenge, MCA has come up with a
new mechanism for rescue of the companies by providing speedy disposal of the insolvency
proceedings under a pre-plan insolvency mechanism.

Intro
Recently, the Ministry of Corporate Affairs (MCA) came up with a pre-pack insolvency proposal
and invited the public's comments, which once accepted, would be engrafted in the Insolvency
and Bankruptcy Code, 2016. MCA proposed the mechanism after seeing the plight of the
distressed companies due to COVID-19. The move will also lessen the burden of NCLT which is
already caught up with a number of cases.
Pre-pack insolvency resolution refers to an informal agreement between the financial creditor
and corporate debtor to resolve the financial distress at its earlier stage. In this framework, an
investor and the secured creditors come forward to resolve a distressed company's debt through a
pre-decided amount rather than opting for a public bidding process or CIRP (Corporate
Insolvency Resolution Process).

Review Of Literature

 Pre-packs in the Indian Insolvency Regime, Ram Mohan MP, Vishakha Raj (2020)
 Pre-packaged Insolvency in India: Lessons from USA and UK, Himani Singh (2020)

Research Methodology
It is important to recognise that the world in which we live and the creation of wealth depends
upon a system founded on credit and that such a system required as a correlative, an insolvency
procedure to cope with its casualties. - The Cork Committee

According to Douglas Baird, three litmus test questions, or axioms, determine a scholar’s
affiliation. These questions are (1) whether the Bankruptcy Code should seek to rehabilitate firms;
(2) whether bankruptcy judges should alter non-bankruptcy entitlements in order to rehabilitate
firms; and (3) whether bankruptcy judges are capable of distinguishing likely candidates for
reorganization from firms that are destined to fail. The paradigmatic proceduralist answers “no” to
each question, while the paradigmatic traditionalist answers “yes” to all three.
Understanding pre pack
As the word, pre-pack has evolved over time, so it does not have any statutory definition.
However, with the changing jurisdictions, the term has acquired different nomenclatures like pre-
packaged insolvency resolution, pre-arranged insolvency resolution, pre-plan sale in the USA
and a pre-agreed business sale in the UK. The terminology may change, but the perception
remains the same. It is a restructuring plan agreed by the creditors and debtors of a company
preceding the insolvency filing, which the court afterward sanctions on an expedited basis. Pre-
packs are referred to as ‘expedited reorganization proceedings’ by UNCITRAL, (The United
Nations Commission on International Trade Law) as the framework follows the process of
restructuring on an expedited basis with a pre-negotiated plan before the outset of insolvency
process under the insolvency law to obtain court confirmation of the plan to bind dissenting
creditors.3
1
World Bank, Ease of Doing Business Reports.
2
World Intellectual Property Organisation, Global Innovation Index.
3
United Nations (2005), UNCITRAL Legislative Guide on Insolvency Law
Pre-packs in other jurisdictions
United Kingdom
Pre-pack insolvency under UK insolvency laws is slightly similar to Corporate Insolvency
Resolution Process (CIRP) in India. It demands an insolvency practitioner appointment who acts
as an administrator in negotiating and arranging the rescue plan for a debtor before formal
administrative proceedings.4
In 2014, Graham Review laid stress on the lack of transparency in pre-pack sales for unsecured
creditors and suggested improvements in marketing, valuation, and furnishing information to the
creditors.5 It instituted a pre-pack pool (a group of experienced business minds) to develop an
opinion to tackle it. Statement of Insolvency Practice (SIP) embraced these measures in
November 2015, and accordingly, the Insolvency Act, 1986 was amended. SIP limits the pre-
pack sale as an arrangement under which all or part of a company’s business or assets is
negotiated with a purchaser before the appointment of an Administrator who immediately after
his appointment carries out the sale. The present law governing in the UK, the Corporate
Insolvency and Governance Act, 2020 has also revived this provided it is exercised before the
end of June, 2021.6 Thus, a pre-pack, which was initially an informal arrangement, emerged as a
formal mechanism.

United States of America

There are three kinds of pre-packs under US Bankruptcy laws- pre-plan sales (Section 363 of US
Bankruptcy Code), pre-packaged bankruptcy proceedings, and pre-arranged bankruptcy
proceedings. Pre-plan sales in the United States and Pre-pack sales in the United Kingdom
resemble each other as the former demands bankruptcy trustee, comparable to the administrator
in the UK, to sell all or considerable corporate debt assets once it sets foot in reconstruction
proceedings. It mandates the trustee or debtor to notify the concerned party regarding the
transaction to file the objection if they have any. The law does not issue any mandate on the
mechanism to evaluate the pre-plan sale, so the courts have established their standards to
discharge the functions.7
In pre-packaged proceedings, the corporate debtor approaches the creditors and seeks approval
for agreement from a specific creditors class. The plan is promulgated with a disclosure
statement to the stipulated category of creditors. Afterward, the corporate debtor initiates the

4
Shriraj Khambet, India: What Is Pre-Pack Insolvency Or Bankruptcy? The Law Point, Mondaq, (Jan. 11, 2021),
https://www.mondaq.com/india/insolvencybankruptcy/1023948/what-is-pre-pack-insolvency-or-bankruptcy.
5
Teresa Graham, Graham Review into Pre-pack Administration, Gov.UK, 26 (June 16, 2014),
https://www.gov.uk/government/publications/graham-review-into-pre-pack-administration#:~:text=The%20report%
20was%20carried%20out,Government%20response%20to%20the%20Review.
6
Report of the Sub-Committee of the Insolvency Law Committee on Pre-Packaged insolvency Process, File No.
30/20/2020-Insolvency Section Government of India, Ministry of Corporate Affairs, (Jan. 8, 2021),
https://ibbi.gov.in/uploads/whatsnew/34f5c5b6fb00a97dc4ab752a798d9ce3.pdf.
7
Id at 6.
Chapter 11 petition provided that he has essential votes in his favor.8 In pre-negotiated or pre-
arranged bankruptcy proceedings, the corporate debtor approaches the key creditors for the
agreement, and the debtor initiates the Chapter 11 petition. Unlike pre-packaged proceedings, no
circulation of notice is required here, and the demand for votes and confirmation of the plan is
raised after filing the petition. 9 The court approves the plan filed under the Chapter 11 petition
subject to compliance with the stipulated disclosure requirements, which, once accepted by the
court, binds the dissenting creditors also.

CIRP and Pre-Pack Insolvency- Why Pre-Pack insolvency stands out?

CIRP
Section 6 of Insolvency and Bankruptcy Code says that even if a corporate debtor commits any
default, he and operational creditors and financial creditors can initiate the CIRP (Corporate
Insolvency Resolution Process) in a specified manner as described in the Code. 10 When the
adjudicating authority accepts the application made by the corporate debtor/operational
creditor/financial creditor, then an Interim resolution professional is appointed to scrutinize all
the necessary documents.11 Then a declaration is made to the public regarding initiation of CIRP
so that creditors can participate. The interim resolution professional after analysing and
assembling all the claims against the corporate debtor determines the financial position of the
debtor and forms a Committee of Creditors (CoC). 12 Meanwhile, the interim resolution
professional shall strive to supervise all the affairs of the corporate debtor's business.13After the
formation of CoC, a resolution professional is appointed who can also be an interim resolution
professional, but he must have at least 75 % of the voting of CoC in his favour. 14 Once the plan
submitted by a resolution applicant approved by the CoC is ratified by the Adjudicating
Authority, it becomes binding on all the interested parties (corporate debtor and its employees,
members, creditors, guarantors and other stakeholders).15
During COVID-19 times, when most companies are facing stress, it becomes very troublesome
to find resolution applicants for each of them. Finally, the companies are forced to liquidate,
which is neither in favor of creditors nor the debtors. Considering the situation of distressed

8
Bankruptcy: What Happens When Public Companies Go Bankrupt US Securities and Exchange Commission, US
Securities and Exchange Commission, (Feb. 3, 2009),
https://www.sec.gov/reportspubs/investor-publications/investorpubsbankrupthtm.html.
9
Dennis F Dunne, Dennis C O'Donnell and Nelly Almeida Milbank LLP, Prepackaged Chapter 11 in the United
States: An Overview, Global Restructuring Review (Dec.11,2019),
https://s3.amazonaws.com/documents.lexology.com/4d031838-9d90-4daf-a767-75c20a308afe.pdf?AWSAccessKeyI
d=AKIAVYILUYJ754JTDY6T&Expires=1612808480&Signature=AL9TdMN71EvGQ9pvzx80.
10
Insolvency and Bankruptcy Code § 6 (2016).
11
Insolvency and Bankruptcy Code, § 18 (2016).
12
Insolvency and Bankruptcy Code, § 21 (2016).
13
Insolvency and Bankruptcy Code, § 20 (2016).
14
Insolvency and Bankruptcy Code, § 22 (2016).
15
Insolvency and Bankruptcy Code, § 31 (2016).
companies, a notification was issued to suspend the CIRP starting from 25th March 2020, which
could be extended to a year if required. 16 CIRP would probably not give the result as demanded
for COVID-19 distressed businesses, so a need to include a pre-pack mechanism was proposed
in the Code.
Proposed Pre-pack
Pre-pack is a hybrid between both the formal and informal framework, which incorporates the
judicial court proceedings and out of court insolvency proceedings as well. 17 Pre-pack is a
confidential process that develops a prior understanding between the corporate debtors and the
investors before initiating the formal insolvency proceedings. As confidentiality is maintained
and consent is given freely on the concerned aspects, this reduces the disputes and litigation.
During a pre-pack framework, the corporate debtor is abided by the promoters and management;
this prevents the business's disorganization. The pre-pack can be initiated by corporate debtors
with the approval of a majority of unrelated financial creditors. In a pre-pack, the debtor is in
possession of the management of the corporate debtor with the creditor in control. It ensures a
speedier, faster and robust mechanism than CIRP. It may commence for the defaults which range
from Rs. 1 lakh to Rs. 1 crore and COVID-19 defaults initially for which CIRP is not in
existence now. Furthermore, Micro Small Medium Enterprises (less than 1 crore) which were
earlier excluded from NCLT will now have its doors open under Pre-pack mechanism.
To sum up, the pre-pack framework initially starts with an informal arrangement between the
investor and corporate debtor and ends up with the formal or judicial set up between the parties.
The court’s decision at the end binds everyone to the pre-pack plan. Although the practice varies
across the jurisdictions, the general premise remains the same.
Pre-pack and CIRP cannot run in parallel. There will also be a cooling off period as per which no
pre-pack will be initiated within three years of the closure of the previous pre-pack.18

Objectives of pre pack resolution framework

a. Prioritising the distribution rights- There should not be any conflicts between the
creditors on the basis of distribution rights on first come first serve’ and the modus
operandi should aim to provide a priority distribution order.
b. Maximising value of assets- Pre-pack should provide an asset maximization approach as
it should focus more on resolving a company's distress rather than liquidating a company.
It would cause less disorganisation in the business.
c. Forum for proclaiming interests- Each and every stakeholder (CD, FCs, suppliers,
employees, workmen, Government) of a company is directly or indirectly affected by the
corporate insolvency. So there should be a proper mechanism so that the genuine claims
of aggrieved people can be heard.

16
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, which has since been regularised by the
Insolvency and Bankruptcy Code (Second Amendment) Act, 2020.
17
Bo Xie (2016), Comparative Insolvency Law: The Pre-pack Approach in Corporate Rescue, Edward Elgar
Publishing.
18
Id at 6.
 d. Reconstruction of the CD- There should be a proper resolution framework under which
the company can be restructured speedily. If the Committee of Creditors is not satisfied
with the plan, then only CIRP should be initiated. Liquidation should be the last option
left to the corporate debtor.

Pros and Cons of Pre-pack

Pros
1. Cost Effective- As the new framework takes less time, it would be cheaper than CIRP.
As the corporate debtor remains with the company's management, it would save the
company's disorganization. An interim resolution professional, resolution professional,
and resolution applicant do not need to run the business. Moreover, pre-pack protects the
company from loss of reputation, and the process remains outside the court, which
reduces the cost.
2. No Job Loss- As the pre-pack commences at the early stage of distress of a company, it
preserves the jobs. Even in the United Kingdom, job preservation has been considered as
the main reason to begin with the pre-pack framework. In the UK, only 20 out of 499 pre-
packs indicated job loss which were mainly because of partial or full shutdown of the
business.19 In the Netherlands, the mean employee retention after conventional
bankruptcy was 34.6% whereas that of pre-packed bankruptcy was 54.1%.20
3. Reduces burden on Courts-NCLT is already burdened with several cases. Providing an
informal mechanism under pre-pack initially and restructuring the company by resolving
the distress and then resorting to NCLT in the last would also help to save time and settle
the matter out of court.
4. Value maximization- A distressed asset has an immense impact on a company’s
business. The more it remains distressed, the more is the loss of reputation. The
disclosure on liquidation will pose a threat to the value of assets. The early resolution
would maximize the value of assets. In a nutshell, pre-pack is an informal process that
takes less time, leading to maximization of value.
Cons
1. Lack of Transparency- As the pre-packaged deal is between the investor and the debtor,
the unsecured creditors feel passive and disempowered. The pre-pack creation and
administration is such that both the parties only work to save the business to secure the
company only. This confidentiality often shuns some of the interested parties. To resolve
this, there should be a proper mechanism to put forth as to why it was essential to proceed
in that particular way.

19
Peter Walton and Chris Umfreville, Pre-pack Empirical Research: Characteristic and Outcome Analysis of
Pre-Pack Administration, University of Wolverhampton, (April, 2014),
https://www.gov.uk/government/publications/graham-review-into-pre-pack-administration#:~:text=The%20report%
20was%20carried%20out,Government%20response%20to%20the%20Review.
20
Henrick Albers et al., Does Pre-Packed Bankruptcy Create Value? An Empirical Study of Post-Bankruptcy
Retention in the Netherlands, International Insolvency Review 320, 336-37 (2019).
 2. No concern towards the future growth of the newly established business- The
insolvency practitioner is focused more on securing the interests of creditors only. The
future growth of the business is still a trouble for both parties. The focus should shift
more towards safeguarding the development of the new company.
3. Lack of valuation methodology: It is generally seen that the valuation of the company is
the same as the investor has set a valuation, which leads to an intuition that the investor
has already fixed a price that he is prepared to give rather than the assets' market value.
4. Pre-pack sale marketing is insufficient- It is generally seen that pre-packs returns are
not sufficient as expected by the creditors. The quality of marketing should be
improved so that the creditors have the viewpoint that they have entered into a best-ever
deal.

Recommendations of the Sub-Committee21

● The sub-committee recommends that the law should set down the requirements to make
an application to the Adjudicating Authority, but not the manner of complying with these
requirements.
● The sub-committee recommends to institute a debtor-in-possession and creditor-in-
control paradigm for pre-packs.
● It recommends strongly that the decisions in matters set forth under section 28 of the
Code shall be taken by the corporate debtor with the approval of the CoC.
● The sub-committee recommends that Insolvency Professionals may play the role of
Resolution Professionals in pre-packs.
● It is recommended that with the acceptance of pre-pack, Resolution Professional may
begin his role in the same way as he practises in CIRP.
● The sub-committee has recommended that the Resolution Professional should appoint
two registered valuers to ascertain the ‘fair value’ and ‘liquidation value’ of the
Corporate Debtor.
● There is a recommendation to grant interim finance to the corporate debtor with the
approval of the Committee of Creditors under Section 28 which will be included in the
IRPC ( Insolvency Resolution Process Cost).
● It is recommended by the committee that from the Pre-pack commencement date the
moratorium under Section 14 should be provided either through a resolution plan or
otherwise.
● To save time, the committee recommends that a period of only ninety days should be
provided to the market participants to submit the resolution plan to the Adjudicating
Authority and after that thirty days period should be given to the Adjudicating Authority
to accept or deny it.

21
Id at 6.
 ● The sub-committee recommends that persons excluded under Section 29A should not be
allowed to submit the resolution plan.
● The sub-committee has recommended that a pre-pack should constitute two perspectives
(i) without swiss challenge with no adverse effect to Operational Creditors and (ii) with
swiss challenge with rights of Operational Creditors and dissenting Financial Creditors
subject to minimum provided under section 30(2)(b).
● The sub-committee has recommended substantially increasing the bench capacity of
NCLT and has also proposed to check if the Administrative Authority or Registrar of
NCLT could admit a pre-pack and if it is not feasible then it could be done by either a
judicial or technical member.

Concluding Remark
The pre-pack framework is a new mechanism that will transform the entire IBC. It will emerge
as the survivor for the companies with speedier and cheaper means. If the sub-committee's
recommendations are followed, it will set a new path to reorganizing corporate debtors. As the
sale and reorganization are two aspects of a pre-pack, a pre-pack should be limited to
restructuring or reorganization only rather than liquidation. This new inclusion in IBC will help
the distressed companies significantly affected by COVID-19 to rapidly reorganize their business
and set up a new market position. Including pre-pack in IBC would be a welcome step.

Bibliography

 Peter Walton and Chris Umfreville, Pre-pack Empirical Research: Characteristic and Outcome Analysis
19

of Pre-Pack Administration, University of Wolverhampton, (April, 2014)

 Henrick Albers et al., Does Pre-Packed Bankruptcy Create Value? An Empirical Study of Post-
Bankruptcy Retention in the Netherlands, International Insolvency Review 320, 336-37 (2019).
 https://www.gov.uk/government/publications/graham-review-into-pre-pack-administration#:~:text=The
%20report% 20was%20carried%20out,Government%20response%20to%20the%20Review.
 The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, which has since been regularised by
the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020.
 Shriraj Khambet, India: What Is Pre-Pack Insolvency Or Bankruptcy? The Law Point, Mondaq,
(Jan. 11, 2021), https://www.mondaq.com/india/insolvencybankruptcy/1023948/what-is-pre-pack-
insolvency-or-bankruptcy.